Stephen Neal, Cooley chairman

SAN FRANCISCO — A federal appeals court on Monday reinstated a $5.3 million employment arbitration award against medical-device maker Masimo Corp. in a case where the company made an issue of the arbitrator’s family ties to Cooley chairman Stephen Neal.

Masimo’s appellate team at Knobbe, Martens, Olson & Bear had claimed JAMS neutral Richard Neal, a former justice on the Second District Court of Appeal, was biased because his brother had lost two big-ticket cases against the company.

The argument persuaded U.S. District Judge Cormac Carney of the Central District of California to toss the arbitration award in 2014, finding that Richard Neal was partial to two former Masimo employees suing the company and had imposed excessive punitive damages. (Richard Neal died on Jan. 1, 2015, while the appeal was pending.)

In an unpublished decision issued Monday, the U.S. Court of Appeals for the Ninth Circuit said that Masimo had failed to demonstrate partiality and the arbitration award should stand.

Kathryn Dickson of Oakland’s Dickson Geesman, who argued for the plaintiffs at the Ninth Circuit, said that she was “thrilled” with the decision. “This is one of the big problems with arbitration,” she said. “If a plaintiff wins big, the employers and companies will stop at nothing to drag it out.”

She added: “The thing that I am most pleased by is that the Ninth Circuit has recognized that the bias challenge was baseless. There was never a more respected, fairer arbitrator” than Justice Neal.

Dickson’s clients, former Masimo sales representatives Michael Ruhe and Vicente Catala, sued the company in federal court in 2011 claiming that Masimo had created intolerable working conditions by forcing them to sell blood-testing devices that didn’t work as promised. The company forced the suit into arbitration, then chose Neal from the plaintiffs’ slate of potential arbitrators.

The company’s lawyers at Paul Hastings and Atkinson, Andelson, Loya, Ruud & Romo asked Neal to recuse himself just three days before scheduled closing arguments in 2014. They claimed Neal, who had issued an interim ruling siding with the plaintiffs, was biased because his brother Stephen had represented a Masimo competitor in a pair of trials in 2004 and 2005 in which Masimo was awarded $164 million and $420 million. respectively. Neal stated that he had no prior knowledge of his brother’s cases and refused to step aside. He later handed down an award that included $5 million in punitive damages.

Overturning the award in March 2014, Carney criticized Neal’s decision to handle the recusal request himself rather than referring it to JAMS as required under the arbitration house’s rules. “The arbitrator’s decision to decide Masimo’s challenge himself, without even making additional disclosures or providing facts on the record to refute the alleged conflict, undermined the fairness of the proceeding and demonstrated his partiality,” Carney wrote.

But the Ninth Circuit panel—which included Circuit Judges Harry Pregerson and Kim Wardlaw—found that Masimo hadn’t established specific facts showing that Neal was biased. Circuit Judge Andrew Hurwitz wrote in concurrence that he was “troubled” by the case but had to side with his colleagues because of the extraordinary deference given to arbitrator’s decisions.

“In general, an arbitrator should not himself determine whether he should be recused, given his financial interest in continued employment,” Hurwitz wrote. However, he noted the recusal request came “very late in an extended arbitration” and that Neal had already earned virtually all of his fees.

Though the punitive damages award of 16 times the amount of compensatory damages raised “obvious due process concerns,” Hurwitz wrote, it did not meet the very high bar for overturning an arbitration award.

Knobbe Martens partner Joseph Re, who argued for Masimo at the Ninth Circuit, wrote in an email that the company was “disappointed” with the decision. Re didn’t say whether or not the company plans to seek further review. The same panel, Re pointed out, upheld a lower court decision dismissing a related qui tam case against Masimo, which claimed that the company had misled customers and the U.S. Food and Drug Administration about its products.

“Unfortunately, although the panel found that the arbitrator committed error, and one of the panel noted that the arbitration award ‘raises obvious due process concerns,’ the panel found that the error did not rise to the level of affirmative misconduct that would justify setting aside the arbitration award,” Re said.

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